Is Equity Crowdfunding Coming To Mexico?

I have a long-standing love affair with Mexico. As a surfer who’s lived there in the past, I’ve come to love the culture, the people and the incredible countryside.

But Mexico has more than just great beaches, food and rich culture. It has a booming economy with positive GDP growth, a bustling engineering and innovation community, and an ecosystem ripe for entrepreneurial growth.

Roughly a year ago, my company, Crowdfunder.com, was invited by top leadership in Mexico to come discuss the opportunities for crowdfunding in Mexico. Many in Mexico had seen Crowdfunder’s success in the U.S. and our role in U.S. JOBS Act legislation, and because of this I was invited by business leaders in Mexico to look at creating something similar to the JOBS Act for the small-business ecosystem there.

Fast forward many months, and we launched Crowdfunder.mx to bring access to capital to Mexican entrepreneurs, while creating an online network for existing Mexican investors.

It’s been a pleasure to spend more time in the country with an eye toward supporting and developing the Mexican entrepreneurial community, and I wanted to share with you what I’ve learned about the fascinating state of startups and small business down in Mexico...

The Story Of Mexican Small Business

You may be surprised to learn that Mexico has an existing & innovative entrepreneurial culture. The country that brought us tequila (thank you, Mexico) has a large and growing technical and software development/hacker community, which is providing a fertile breeding ground for startups. It’s also a little known fact that Mexico is Startup Weekend's largest market outside of the U.S., and that between 60,000 to 110,000 new engineers graduate in Mexico annually.

Small business is a powerful force in the Mexican economy. Small and medium businesses (SMBs) account for 52% of GDP and 72% of job creation in Mexico, making up an even more significant portion of the economy than does small business in the U.S.

The amount SMBs contribute to the Mexican economy is impressive, especially considering the incredible fact that 79% of all Mexican SMBs are essentially self-financed. See the stats below.

46% of SMBs fund their ventures with personal savings, and vendor agreements ( e.g., business practices such as factoring). 33% receive loans from family members. Only 18% of SMB entrepreneurs access financing via commercial banks, with an additional 3% gaining financing from the National Development Bank.

Even though SMBs create nearly three-quarters of the jobs in Mexico, the mortality rate for SMBs is still high. Three out four Mexican SMBs fail within two years, and the failure rate is even higher for micro-businesses. In Mexico, as in the U.S., one of the major causes of SMB failure is financing challenges. While there is plenty of capital available inside Mexico that could be put to work, the ecosystem and investment markets haven't shaped up to put more of it into play for business owners.

What Do Mexican Entrepreneurs Need?

So what does all this mean? Currently, 79% of Mexican entrepreneurs would benefit from access to grassroots capital -- those who currently rely solely on savings, family loans and vendor financing. Not to mention the would-be entrepreneurs who haven’t made the plunge yet, due to their inability to access start-up capital.

Access to capital is one of the biggest hurdles Mexican entrepreneurs currently face, but there are others. SMBs report their largest challenges to success as:

Financing: 48%

Management: 43%

Sales: 16%

Accordingly, most experts agree, the Mexican entrepreneurial community could benefit greatly from more resources in the following categories:

Access to capital

Business education

Networks and mentorship

If awareness is the first step towards growth, Mexico is poised to jump to the next level. The Mexican federal government has a strategic vision towards entrepreneurship, articulated by the National Institute for Entrepreneurs (NIE). Among its goals are fostering an environment that facilitates scaling of SMBs, and promoting the consolidation and strengthening of financing and capital markets for entrepreneurs.

Is Crowdfunding The Solution?

The opportunity to provide access to capital for small business owners south of the border is tremendous. Business crowdfunding can have a substantial social impact for the citizens of Mexico by bringing opportunity and new access to capital -- including both investors and small business owners. Business crowdfunding in Mexico has the potential to create an entirely new capital market, and to jump-start SMB growth there. This could level the playing field and generate more opportunities for Mexican entrepreneurs, especially for those who aren't connected into the network of the very wealthy few.

In words of Jesús Ramírez Díaz, Secretary of the Mexican Senate’s Science and Technology Commission,

Nowadays crowdfunding is a real and sustainable social alternative that should be adopted as public policy for financing entrepreneurs in Mexico. Crowdfunding mechanisms are exactly what the government needs to support in order to stimulate and foster innovation and business culture in our country.

The timing is right for crowdfunding and an online investment network in Mexico, thus we’ve begun localizing Crowdfunder for the launch of Crowdfunder.mx. Knowing that it takes an ecosystem, Crowdfunder.mx is being shaped with strategic partners like the National Development Bank for SMBs, Endeavor Mexico, Angel Ventures Mexico, Monterrey Tech (ITESM), 500 Startups Mexico City, and more, in order to satisfy investor's main challenges in Mexico which include:

Opening The Funding Floodgates

There is real room for growth in the Mexican venture capital industry, as V.C. firms in Mexico deploy funds representing only 0.04 percent of the country’s G.D.P. According to Crowdfunder.mx research, the main difficulty for institutional and independent investors is lack of access to high-quality deals. Mexican investors are ready and willing to invest, but they communicate that they lack the means to connect with worthy companies and founders that are deserving of outside investment.

Crowdfunding, or more broadly, online investment networks, can help provide more of those right connections. Enrique Jacob Rocha, president of the NIE told my colleagues in Mexico recently,

We believe the time has come for crowdfunding to mature from its creative projects base, to satisfy the needs of companies and investors with opportunities for investment in equity and debt. For the first time, entrepreneurs will be able to fundraise on platforms with access to a much broader pool of investors, and then get ready to approach private V.C. funds.

Educating Mexican Entrepreneurs

For Mexican SMB entrepreneurs, the challenge isn’t simply obtaining capital. Education is also a key piece of the puzzle. Crowdfunding provides opportunities for informal education by connecting like-minded people with similar interests -- investor to entrepreneur, entrepreneur to entrepreneur, and investor to investor, and showing what works through market validation and real world examples.

However, before Mexican SMB owners can take advantage of the education found through crowdfunding networks, they have to actually know about and understand the value of crowdfunding.

The Multilateral Investment Fund (MIF), a member of the Interamerican Development Bank, shared with me that they believe crowdfunding offers a unique opportunity to create new forms of financing for innovative businesses.

However, MassSolution, a consulting firm hired by the MIF, concluded that while Mexican technology companies have some access to crowdfunding, they rarely take advantage of this alternate source of financing.

The missing links here are better awareness/information and more opportunities for education and modeling of successful businesses and leaders. Meanwhile, stakeholders in the Mexican ecosystem all seem to be acutely aware of these missing pieces- from the government, to early stage investors like Alta Ventures Mexico, to entrepreneurial communities like Endeavor Mexico.

That’s why we’re now seeing an exciting mix of initiatives and efforts in Mexico to combine technology and financing with education, and even some legislative reform rumored to be coming forth, to transform the fundraising experience there. Access to crowd-raised funds alone will not be the game changer needed.

Crowdfunding Goes Local, In Mexico

One example of an educational, relationship-building program tied into crowdfunding is CROWDFUNDx -- a series of online+offline events being created and kicked off in key cities in US and Mexico to strengthen local communities and educate investors and entrepreneurs.

Patterned after the successful TEDx model, CROWDFUNDx is a D.I.Y. tool (but for building local startup communities) that engages people within a given local entrepreneurial ecosystem by leveraging local leaders to lead their own communities. The CROWDFUNDx model creates a 90+ day acceleration process where startups compete for votes and ratings from the crowd, giving entrepreneurs a local process for visibility locally, and giving investors a place to plug in and help identify the top local deals.

These networks are starting to grow their membership online, and leaders in the communities plan to have their first CROWDFUNDx community events in the coming months and quarters.

If CROWDFUNDx works in Mexico as well as it has in 3 U.S. local initiatives, then these communities will help identify a handful of top investment-worthy businesses in each city, and bring investors to the table over the Crowdfunder social network.

It’s clear, crowdfunding and online investment networks have promise for an entrepreneurial country like Mexico, but simply giving small business owners access to investors is not what is going to be most meaningful and transformative. The big idea for Mexican entrepreneurs is providing a combination of access to investors, education, networking and mentorship. Crowdfunding can help meet these needs, and if managed effectively, can super-charge the process through localized social networks and face-to-face community events.

Wait, Is Equity Crowdfunding Legal In Mexico?

Mexico has it’s own definition of accredited investors. There the definition is someone who makes roughly $160,000 U.S. dollars, as opposed to the $200,000 for qualification as a U.S. accredited investor.

The legal environment does not allow for non-accredited investor activity, but expect activity around private accredited investment networks in Mexico soon.

At present, there is no current JOBS Act type legislation that has passed in Mexico. However, based on interactions by the Crowdfunder Mexico team with government leadership and key policy influencers, it’s likely that legislation will be introduced in the near future.

What You Can Do Now

You can check out some of what’s happening at Crowdfunder Mexico in the CROWDFUNDxMexicoCity community on Crowdfunder to be part of it as an entrepreneur or investor.

If you want to get more personally involved in Mexico, a key local catalyst in the Mexican crowdfunding ecosystem is Pepe Villatoro, CEO of Crowdfunder Mexico, who can be contacted on the Crowdfunder social network.

The business crowdfunding revolution is taking shape in Mexico, and the ecosystem leaders are calling for the creation of this new capital market through new legislation in Mexico.

If you want to support entrepreneurship in Mexico, alongside other leaders, then please post your support here on Forbes for new Crowdfunding Laws in Mexico by copying and pasting the following into the Comment box below: